Mortgage Approvals Currently Being Shaped by Student Loans

Students searching for the best mortgage rates are having a hard enough time with the loan approval process. The real estate industry is currently trying to grapple with the fact that the rise in student debt might be ruining the chances of millennials ever owning a house. According to Loan Depot, those loan applicants who have student debt to pay are turned down a lot more than applicants without debt, understandably. However, data from the same source indicates the smallest changes in a loan applicant’s debt payments on a monthly basis could make all the difference regarding whether the loan will be approved or not.

Loan Depot also found that there is no significant distinction between those with student debt whose loans were approved and those that were not. Those still paying off their student debt and had loans approved stood at 27.3 percent while those whose application was declined and still had student debt to pay standing at 26 percent.

Increasing student debt burden

Across the divide, data shows there are clear signs student debt is continuously becoming a burden. At the beginning of 2014, those applying for mortgages that still had student debt to pay had student loans valued at $35,000, although the difference between total student debt burdens among the funded and unfunded was very minimal.

Ability to pay metrics currently in use

Mortgage underwriters use a number of key metrics to analyze whether a borrower is capable of repaying a loan, such as the total debt to income ratio. This metric has been cited as exactly what is making student debt a burden when it comes to mortgage loan approval. As per the new mortgage rules that became active in 2014, lenders now have a larger legal liability in case they fail to verify the ability of a borrower to repay a mortgage properly. Lenders now have a huge legal shield because if they realize the total income to debt ratio of a borrower is more than 43 percent it would most definitely lead to denial of a mortgage loan.

Among the approved and denied mortgage loans, student credit is largely similar, with the major distinction being a couple of hundred dollars in student debt that pushed the total debt to income ratio beyond the 43 percent approval threshold. This is why many housing analysts say young adults have no idea that applying for student loans worth thousands of dollars affects their borrowing years down the line. Many only come to terms with what they did only years later once they realize they are unable to get a mortgage application approved. However, the Loan Depot data indicates this issue did not affect loan applicants between 2011 and 2013 but only recent applicants.

Other analysts believe lenders in the mortgage industry must study and develop flexible guidelines in underwriting that also incorporate student debt. Investors expect homeownership rates to continue facing lots of pressure, until lenders and mortgage investors create new mortgage loan products and different underwriting tools that are flexible enough for those still paying off their student loans.